Buying restrictions eased for Fannie, Freddie

Companies press regulator for even more flexibility; shares climb on news

WASHINGTON (MarketWatch) -- In a bid to help struggling subprime-mortgage borrowers, the federal regulator for Fannie Mae and Freddie Mac said Wednesday it will allow the two huge companies more buying power in the mortgage market.

The regulator said it will raise the portfolio cap for both companies to $735 billion, effective July 1, 2007.

That gives each company room to buy about $7 billion in new loans.

The companies' shares rose after the announcement, but each petitioned the regulator to allow it even greater buying ability. Congressional Democrats also said the move was inadequate.

Both Fannie and Freddie have stated they want to buy more mortgages to pump greater liquidity into the market. Democrats have pressed for the companies' portfolios to grow, saying the result would help borrowers.

Small increase

Wednesday, the Office of Federal Housing Enterprise Oversight said it would allow a per-quarter increase of 0.5% in Fannie Mae's
FNM, +4.51%
mortgage portfolio, thus limiting portfolio growth to no more than 2% a year.

Freddie Mac
FRE, +0.00%
has a similar agreement with the regulator. The change for Fannie would be effective Oct. 1.

Both Fannie and Freddie welcomed Ofheo's move but said more action was needed.

"We still believe the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10%, so that we can more fully address the ongoing turmoil and bring much needed liquidity to the mortgage market," said Brian Faith, Fannie's director of communications, in a statement.

"Lifting the caps more broadly on [Fannie and Freddie's] portfolio growth would provide a much-needed backstop bid for mortgages, sending a positive signal to the markets," said David Palombi, Freddie Mac's senior vice president of communications.

Heading off foreclosures

In a statement, Ofheo said the flexibility on Fannie and Freddie's portfolio cap, in addition to their other business activities, will help them buy or securitize as much as $20 billion in subprime and other mortgages.

Meanwhile, Senate Banking Committee Chairman Christopher Dodd, D-Conn., said Ofheo's move was "timid and inadequate," and called on the White House to give Fannie and Freddie greater rein.

"It's time for the administration to...act appropriately to protect homeowners from abusive loans and restore confidence and liquidity to the mortgage markets," said Dodd, who is seeking his party's nomination for president.

Sen. Charles Schumer, D-N.Y., said Ofheo has put its "toe in the water" and needs to "jump in."

"The [government-sponsored enterprises] certainly need more room to grow their mortgage portfolios," Schumer said in a statement. "But an increase this small doesn't respect the magnitude of this crisis. Hopefully this rigid, ideologically driven opposition to raising the caps is about to fade."

Grim housing news

The regulator's move comes amid more grim news for the U.S. housing market. Wednesday morning, the Commerce Department reported that housing starts and permits both fell to 12-year lows in August. Single-family home-building was even worse than the overall number, the data show. In August, single-family home starts dropped by 7.1% to an annual rate of 988,000, a 14-year low. See full story.

Also Wednesday, the Senate Banking Committee approved a bill that raises the loan limits for Federal Housing Administration insurance eligibility, a move that will increase the number of FHA-backed loans in the marketplace. The panel's action follows passage on Tuesday by the House of an FHA reform bill. See full story.

Both Fannie Mae and Freddie Mac were chartered by Congress to provide liquidity to the mortgage market. They buy loans from banks and other lenders and repackage them as mortgage-backed securities, thus freeing lenders up to make even more loans.

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